Obstacles in International Trade That Aren't Tariffs: Understanding Multifaceted Challenges - Kinds, Causes, Advantages, Disadvantages
Going Off-Shore with Caution: Understanding and Navigating Hidden Obstacles in International Trade
Unveiling the not-so-obvious challenges impeding the smooth flow of international trade, non-tariff barriers lurk in the shadows, working covertly to hinder global commerce. Complementing tariffs, they form the duo known as trade barriers.
These puzzle pieces subtly manipulate the market dynamic, impacting the inflow and outflow of goods within and across borders. Some countries leverage them to nurture their homegrown economy, while others wield them strategically to counter similar measures by rival nations.
Skeptics argue that non-tariff barriers can squander the benefits of free trade, leading to misallocation of global economic resources. Costs in one market morph into profits for others, creating a ripple effect that distorts the overall distribution of wealth. Furthermore, unlike tariffs, non-tariff barriers do not generate revenue for the government.
The Trade Barrier Tango: Tariffs vs. Non-Tariff Barriers (NTBs)
Dancing around international trade, barriers can be grouped into two main categories: tariff barriers and non-tariff barriers (NTBs). While both serve the same purpose of restricting trade, they differ in their methods, impacts, and implementation.
The Star Turn: Tariff Barriers
Taxes and Duties: Slapping additional costs on imported goods in the form of tariffs or duties is one approach to restrain trading. This added charge inflates an imported product's domestic market price, making it less competitive against domestically produced items. The revenue collected from these taxes, however, goes into the government's coffers, normally earmarked for social programs or other public initiatives.
Curtains up: Tariff barriers are prone to simple execution as they are largely administered through the incorporation of custom duties, which are straightforward and less intricate. The import tax rate is typically a fixed percentage of the product's value, ensuring transparency and predictability for businesses involved in cross-border trades.
Encore: Though tariffs enhance the consumer's expenses, the extra cost does not directly translate into profits for importing companies. Instead, the revenue generated flows into the government, bypassing the private sector.
The Ensemble's Secret Star – NTBs
Dancing to a different beat, NTBs eschew direct taxes on imported goods. Instead, they can manifest as quotas, licensing needs, product standards, or subsidies designed to safeguard national industries, consumer safety, security, and the environment.
Unexpected Kicks: Though NTBs don't directly increase costs via taxes, they can indirectly influence import prices through, for example, quotas that cap the volume of goods one can import, causing a potential supply shortage and price hikes due to the principles of supply and demand.
Behind-the-Scenes Complexity: Compared to tariffs, NTBs can be trickier to roll out and enforce, necessitating bureaucratic procedures and testing. This complexity can create uncertainty for businesses, making it tough to strategize and budget for international trade activities.
Hidden Benefits for Playhouse Players: In an economy driven by competitiveness, NTBs can create profit opportunities for companies that skillfully navigate the regulations and secure import licenses or adhere to stringent standards. A prime example is when a quota is imposed on an item; domestic enterprises that can produce that product may benefit from increased prices and diminished competition.
Why the Dance?
Reasons behind governments' implementations of non-tariff barriers can be multi-faceted.
First Act: To shield domestic employment, high imports can ignite an exponential increase in competition, forcing domestic industries into extinction and leaving a trail of unemployment.
Second Act: Barriers exist to safeguard consumers, national security, and the environment. The government prevents hazardous products from flooding the market that do not comply with domestic standards, posing a threat to consumers' health and the domestic environment. Furthermore, the defense industry often enjoys robust protection due to its strategic importance for national security.
Third Act: The curtains open for nurturing new industries. By limiting imports, governments reduce competitive pressure on the embryonic industry, giving it some breathing room to grow, reach maturity, and thrive in the international market.
Fourth Act: The government dons a fighter's mask when partner countries impose unjust barriers, retaliating through similar measures.
In the Spotlight: Types of Non-Tariff Barriers
A myriad of non-tariff barriers lurk in the shadows, each with unique features. Here are some of the most prominent:
- License
- Standardization
- Local content requirements
- Import quotas
- Embargo
- Export subsidies
- Exchange rate devaluation
- Voluntary export curbs
- Administrative barriers
Center Stage: License
Embracing the role of gatekeeper for international trade, governments can grant, refuse, or revoke import or export licenses. Meeting specific criteria, such as a proven track record, minimum experience, or financial stability, may be necessary to obtain these licenses. This process can be time-consuming, expensive, and unpredictable, potentially barring smaller businesses or new entrants to the import/export market.
Steel Curtain: Standardization
Authorities demand that products conform to specific domestic standards for consumer safety, public health, sustainability, national security, or protection of the environment. These standards can dictate the classification, labeling, or testing procedures for a product. While standardization can strengthen consumer trust, excessively stringent or convoluted regulations can become obstacles for foreign companies trying to enter the market.
The Production Line: Local Content Requirements
Governments may set guidelines mandating a certain percentage of raw materials used in export goods to be sourced domestically. This measure is intended to stimulate domestic industries that supply these materials, fostering job growth and possibly augmenting government revenue through taxation. However, these requirements can escalate production costs for exporters, making their products less competitive in the global market. Additionally, local industries may struggle to keep up with demand or maintain high-quality production, hindering overall export success.
The Border Control: Import Quota
Establishing a maximum import volume for certain items, import quotas restrain the influx of goods into a country. Governments can grant licenses to several companies, stipulate the limit for each firm, or temporarily increase the limit. In countries where imports exceed quotas, additional tariffs or duties may be imposed to curb the inflow further.
The Cold War: Embargo
An embargo is a full-scale trade ban on specific products or entire economies, usually enacted for political purposes or to pressure targeted countries to modify their policies. Embargos can have severe economic fallout, disrupting supply chains, restricting the flow of essential goods, and hindering economic growth. An example of this is the US embargo on Cuba that has limited trade between the two nations for close to 60 years.
Subsidies Showdown: Export Subsidies
Financial incentives provided by governments to encourage exporting include low-cost loans, direct cash payments, tax breaks, and sponsored advertising campaigns. By reducing production and export costs, subsidies assist companies in offering competitive prices in the global market. This can lead to increased exports, job growth in export-related sectors, and an overall boost to the economy. However, export subsidies can distort fair competition in the international market, disadvantage companies from other nations, and lead to trade tensions. Moreover, export subsidies can put a strain on government finances, raising concerns about long-term economic sustainability.
Ripple Effects: Exchange Rate Devaluation
Intervening in foreign exchange rates can have an impact on exports and imports. For example, China's decision to devalue its currency, the Yuan, has made its export products cheaper on the global market, encouraging increased exports. Conversely, devaluing the Yuan has made imported goods more expensive for Chinese consumers, prompting a shift towards domestic products and lowering import volumes.
Dance to a Different Tune: Voluntary Export Curbs
Voluntary export restraints refer to agreements between importing and exporting countries. Exporting nations limit the volume of goods shipped to the importing nation as part of a political alliance or trade agreement. As an example, Japan agreed in 1981 to curb its car exports to the United States, setting an annual limit of 1.68 million automobiles. Subsequently, in 1985, the limit increased to 2.3 million units.
Red Tape: Administrative Barriers
Complex administrative procedures can coincide with a barrage of inspections, certifications, and extensive paperwork to discourage imports, creating a bureaucratic maze for companies. These bureaucratic hurdles increase the cost of importing goods and reduce their competitiveness compared to domestically produced alternatives, potentially hindering consumer choice and culture diversity.
Swirling Sands of Non-Tariff Barriers' Impacts
Non-tariff barriers carry both constructive and adverse effects.
Glimmers of Hope:
Job Creation: Non-tariff barriers can spur job growth in protected industries by curtailing imports and boosting domestic production.
Safe Haven for the Emerging Industries: Infant industries can find a protective fortification from stringent non-tariff barriers, allowing them time to mature and compete on the global market.
Floodgates and Controlled Flows: Governments can manage the flow and range of commodities entering the country, protecting national security, public health, and the environment.
Sunny Side Down:
Prices Screwed Up: Non-tariff barriers can drive up consumer prices due to decreased competition and additional costs associated with adhering to complex requirements.
Jettisoning Innovation: Overly protected domestic industries may lose the incentive to innovate and improve, leading to stagnation and reduced quality.
Impoverished Choices: With limited import options due to barriers, consumers miss out on the benefits of diverse products, potentially at lower prices from foreign competitors.
Stepping into a Trade War: Non-tariff barriers can foster an unfair competitive landscape, setting off trade tensions, shaking up global supply chains, and inflating consumer prices worldwide.
Curdling Milk: The Impact of COVID-19 on Non-Tariff Barriers
The COVID-19 pandemic has become a source of non-tariff barriers due to supply disruptions, trade restrictions, and logistical challenges affecting international trade flows. In some instances, these challenges have led to the temporary suspension of free trade agreements or the imposition of additional non-tariff barriers to address domestic production shortages.
References
[1] Hufbauer, G. C., & Schott, P. J. (2015). Economic sanctions and American diplomacy since 1492. Peterson Institute for International Economics.
[2] Satorius, R., & Kröner, N. (2017). NTBs of the Eastern Partnership: Lessons for FTA negotiations. Chatham House Working Paper.
[3] World Trade Organization. (2003). Trade policy review: United States. World Trade Organization.
[4] Wood, R., Mbdila-Shonga, J., & Burenstam Linder, L. (2020). COVID-19 and its implications for non-tariff measures. OECD Policy Responses to Coronavirus (COVID-19).
[5] World Trade Organization. (2021). Non-tariff measures (NTMs) and domestic regulation. World Trade Organization.
- In the realm of global news, the delicate dance between tariffs and non-tariff barriers (NTBs) often comes to the forefront of discussions on international trade, as governments carefully choose their moves to maintain a competitive edge.
- Meanwhile, the finance sector is closely monitoring the impacts of non-tariff barriers, such as import quotas, local content requirements, or administrative barriers, since they can indirectly influence import prices and potentially spur trade tensions, affecting business strategies and investment decisions.
